Ethiopia - Fiscal Federalism: Fiscal Policy Considerations for the Medium Term

Ethiopia’s interregional fiscal arrangements entail a sizable redistribution of resources. They help the objective of income redistribution and equity, as well as providing partial insurance against regional macroeconomic shocks. However, overall transfers from the federal government to regions have been constrained by limited fiscal space. By law, regions cannot borrow without Ministry of Finance approval. There is room to improve redistribution and stabilization features of Ethiopia’s government finances, strengthen regional budgetary frameworks, and mobilize domestic resources to support socio-economic development. Implementation of revenue mobilization reforms will require support from the federal government to strengthen tax administration in the regions. Lastly, the curtailment of overseas development assistance would disproportionately affect regions with large humanitarian and disaster risk expenditure requirements.